A
loyal reader asked me about TBT – the exchange traded fund to short the long bond.As you may remember,
I was very bullish on TBT last year; but it turned out to be one of my worst trades.

The best thing to do when a trade goes
the wrong way is to learn from it.In this case, TBT serves a dual function for me – as both a potential
trade as well as a leading indicator of the business cycle.

The fact that TBT took a dive provided a very strong indication to
me that the economy was slowing back down and the market would turn; that was partly the basis of my cash call back in February,
which has turned out to be the right call.

Today, TBT remains a technical sell.Why?The economy
is softening.China continues to buy our bonds to manipulate its currency.QE2 from
the Fed is not quite done.That trifecta keeps interest rates down and therefore TBT down near its 52-week
low.

As
to why the economy is softening, see last week’s newsletter.It’s not a particularly pretty
picture right.

So I say stay in cash until a bullish market trend reasserts itself.And watch TBT as
a very good leading indicator of any recovery – or Chinese yuan strengthening.

As
loyal readers know, I have been on a bit of hiatus working on my new book (with Greg Autry) called Death by China.(As you may imagine from the title, it’s a barrel of laughs.)

On that note, if you live in the Southern California area, we will have the
book debut on June 7 at UC-Irvine.If you live on the East Coast, the debut will be on June 16 at the Washington
Press Club.(Anybody who would like to attend one of those events, drop me an email and I’ll get
you the details.)

With
that out of the way, let’s talk some market turkey.As I bit of history, I issued a cash call the
week ending February 25, 2011 and reiterated that call in my last newsletter, which was for the week ending April 1, 2011.At the time of my initial cash call, the Standard & Poor's 500 index as measured by the exchange traded fund SPY was
at $132.As of today, SPY stands at $133.Whoop de do.

You can argue and rightly from short term trader’s perspective that by staying on the sidelines, I gave up
trading a lot of volatility.For example, after my cash call, SPY bottomed at $126 on March 16 and went
up 10 points by April 29.So I suppose you could have made a few bucks there.

But to be clear, short term trading isn’t really my bag.What I try to do is determine the
market trend based on both big picture macro fundamentals and confirming technical indicators – and loyal readers will
know that I have done that with some significant success.

In this case, after
a solid move off the March lows of 2009, I saw the market back in February settling into a longer term sideways (and possible
down) pattern.Here is the macro backdrop that now continues to motivate my cash call:

The fiscal and monetary stimuli in both Europe and the U.S. have largely run their course – and helped stimulate
the investment led recovery we have witnessed.However, that stimuli was not sufficient to bootstrap either
consumers or exports up to the status of follow-through on the investment led recovery.The
bearish factors in the U.S. now include:

·Chronically low consumer confidence supported by stagnant income growth, continued high unemployment, a moribund
housing market,·The continued offshoring of business
investment to China and elsewhere·A squeeze on local and state government
spending because of budget crises·The aforementioned end to the fiscal
and monetary stimuli·Most importantly, the continuation of
the large trade deficit with China that saps our economic strength and zaps our manufacturing base.

In other words, in the U.S., nothing has really changed structurally to breed great optimism.

The bearish factors for Europe include:

·Hey, it’s frigging Europe.Slow growth is the norm.·The PIIGS remain in trouble, with fiscal austerity measures likely to kick in with
a vengeance in Greece, Portugal, and Ireland.·The continuation of China’s fixed peg to the U.S. dollar; with a falling dollar,
this is killing Europe, which runs an even bigger trade deficit with China than the U.S.The
bearish factors of Asia include:·The failure of China to structurally
revamp its GDP growth equation to reduce its export dependence and create a more self-sustaining, consumer-led economy.·The folly of China using higher interest
rates and higher reserve requirements to fight inflation rather than allowing the yuan to strengthen.This
is DUMB beyond belief.·The as yet unrealized fact that Japan’s tsunami is proving highly
disruptive to the global supply chain.

Bottom line: If the U.S. and Europe aren’t strong enough to support China’s growth and China’s
consumers aren’t strong enough to buy exports from the U.S. and Europe, it will be difficult for the global economy
to boom.

I don’t
see a recession at this point.I do see the same kind of sub-par growth rates in the U.S. and Europe we
witnessed in the last decade and flat market characterized by bursts of optimism.

So I remain in cash – except of course for my various flings with biotech
stocks.Even here, I remain cautious.My one big position now is in Cytokinetics (CYTK).So please don’t shoot the messenger.I have always made my best money in periods where the trend has been strong – and such periods are getting rarer.So just be patient; and at some point, I hope I will have better news.

DISCLAIMER:
This newsletter is written for educational purposes only.By no means do any
of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.Trading and investing involves high levels of risk.The authors
express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.The authors may or may not have positions in the financial instruments discussed in this newsletter.Future results can be dramatically different from the opinions expressed herein.Past performance does not guarantee future performance.

DISCLAIMER: The newsletters
and blogging on this page are written for educational purposes only.By no means
do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.Trading and investing involves high levels of risk.The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.The authors may or may not have positions in the financial instruments discussed in
this newsletter.Future results can be dramatically different from the opinions
expressed herein.Past performance does not guarantee future performance.